By Tax-Legal PA, in association with www.lexefiscal.com
Business Disposal Relief (BDR), formerly Entrepreneurs’ Relief, has long been a coveted incentive in the UK tax system. Designed to support entrepreneurship, it reduces the rate of Capital Gains Tax (CGT) to 10% on qualifying business disposals, up to a lifetime limit of £1 million. But despite its apparent generosity, it is riddled with traps that can catch even the most experienced taxpayers and their advisers unaware.
This article highlights some of the most misunderstood provisions in sections 169S, 169SC, 169SD, 169VC(2), 169VB(2) and the relatively underused section 169VM (Investment Relief) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992).
- The Basics: Section 169S TCGA 1992 – The 2-Year Rule
At its core, BDR applies to disposals of all or part of a business, shares in a personal company, or assets used in a business. However, timing is everything.
Section 169S(3) requires that the business or the individual’s role in it must meet the two-year qualifying period immediately preceding the date of disposal.
Common Trap:
Many assume a business qualifies as soon as trading commences, but mere preparatory work does not count. Likewise, if a business ceases, the clock stops. Disposals made more than three years after cessation will not qualify (per s.169I(6)(b)).
Tip:
Keep a precise record of when the business started to trade, not just when it was formed.
- Section 169SC: Associated Disposals – Beware of Partial Use
Where a sole trader or partner disposes of a business asset (say, property), BDR can apply under section 169SC, provided it’s associated with a withdrawal from the business (e.g., retirement or sale of business).
But here’s the sting: if the asset wasn’t used wholly for the business, the relief may be restricted.
Example:
Joe owns a shop with a flat above it. The ground floor was used for the business; the flat was let privately. On sale, only the business-use element may qualify.
Section 169SC(4) provides that relief is reduced where the asset was not used wholly or mainly for business purposes during the period of ownership.
Additional Trap:
Watch out for rent—if the business paid rent to the owner personally, section 169SC(3) may exclude relief altogether.
- Section 169SD: The “Material Disposal” Requirement
Relief on associated disposals also hinges on a “material disposal of business assets”, per section 169SD. This means that the disposal must be substantial and linked to a wider business exit.
Partial share disposals or the sale of a few assets without ceasing or reducing one’s interest in the business may fail this test.
Trap:
You can’t just flog a company car and claim relief. The disposal must accompany a material reduction in the individual’s stake—e.g., retiring from a partnership or selling your shares.
- Section 169VC(2): Personal Companies – Mind the Ownership Threshold
For share disposals to qualify, the company must be a personal company—i.e., the individual must hold at least 5% of ordinary share capital and voting rights.
Section 169VC(2) reinforces this by requiring the individual to be an officer or employee of the company for the full two-year period.
Trap:
Share dilution can disqualify a claim. If, say, new investment reduces a founder’s stake below 5%, relief is lost—even if they built the business from scratch.
Tip:
Use pre-sale restructuring (e.g., alphabet shares, or “ratchets”) carefully to maintain the 5% threshold—but mind anti-avoidance provisions in section 169BA.
- Section 169VB(2): Joint Ventures and Non-Trading Companies
Where the company holds investments, property, or minority interests in joint ventures, it may be disqualified under section 169VB(2).
This section excludes companies that are not trading companies or holding companies of trading groups.
Trap:
A company renting out property, or sitting on a large investment portfolio, may not count as “trading” for BDR—even if the owner works full-time in the business.
HMRC takes a strict view, often citing the case McQuillan v HMRC [2017] UKUT 344 (TCC), where share disposals failed to qualify because of non-trading activity.
- Section 169VM: Investment Relief – Underused but Powerful
Introduced in 2020 to support External Investors, section 169VM gives relief to those who invest in unlisted trading companies and hold shares for at least 3 years.
Unlike BDR, there’s no requirement to be an employee or officer, and no 5% minimum stake.
Key Criteria:
- Shares must be subscribed for in cash.
- The company must be a trading company throughout.
- Relief applies only to gains made on new shares (not secondaries).
Trap:
If the company’s trade ceases or becomes non-qualifying within 3 years, relief is lost. Also, anti-avoidance provisions under section 169VL apply if the investor is connected with the company.
Conclusion: A Relief Worth Earning, but Easy to Lose
Business Disposal Relief offers valuable tax savings—but the hurdles are many, and often deceptively technical. Lay taxpayers may not spot issues like a rental payment killing a claim, or a trading company drifting into investment status. Meanwhile, advisers must be scrupulous with timelines, shareholdings, and HMRC’s increasingly aggressive position on definitions of “trade”.
With lifetime limits reduced and HMRC scrutiny on the rise, a cautious and proactive approach is critical. A successful BDR claim often hinges on early structuring advice, especially before sale negotiations or succession planning.
Confidentiality and Restriction on Disclosure Disclaimer
This article has been prepared for general information purposes only and does not constitute legal or tax advice. The information is based on legislation and HMRC guidance in force as of April 2025. Individual circumstances vary, and legal advice should be taken before relying on this article. This publication is confidential and may not be disclosed, copied or distributed without prior written consent from LEXeFISCAL LLP, which reserves all rights. Professional liability is excluded unless formally engaged in writing.
Need a Review of Your Position?
At www.lexefiscal.com, we offer a comprehensive Business Disposal Relief & Investment Relief Review. For a fixed fee of £3,500 + VAT (valued at £5,500 + VAT), we will:
- Analyse your business structure and shareholding history,
- Assess eligibility for BDR or Investment Relief,
- Identify traps and planning opportunities,
- Advise on pre-sale restructuring or asset-use alignment,
- Prepare a claim strategy to HMRC, including pre-sale clearance if suitable. (additional cost based on complexity)
Business Disposal Relief: One Wrong Move Could Cost You 90% Relief
Business Disposal Relief (BDR) is one of the UK tax system’s most generous incentives—but it’s also one of the easiest to lose. From share dilution to asset-use missteps and the timing of disposals, the traps are technical and unforgiving.
At LEXeFISCAL LLP, we specialise in unlocking and preserving BDR and Investment Relief with expert-led reviews.
Led by:
Dr Clifford John Frank
LLM (Tax), HDIpICA, PhD, CPA
Senior Partner | LEXeFISCAL LLP
Email: clifford.frank@lexefiscal.com
Mr Angelo Chirulli
Master’s Degree, ACA, ADIT, BFP
Tax Partner | LEXeFISCAL LLP
Email: angelo@lexefiscal.com
Justyna Szymaszek
Law (LLM)
Tax Manager | LEXeFISCAL LLP
Email: justyna@lexefiscal.com
